Inventory Management

:STOCK, STOCK, BEAUTIFUL STOCK:PILES ON THE SHOP FLOOR AND THE

WARE-HOUSE AND MORE IN THE DOCK.

:SOME OF IT ANICIENT, SOME OF IT NEW:ALAS AND TOMORROW ANOTHER LOT IS

DUE….

-- UNKNOWN AUTHOR

Functions of Inventory

• Decouple components of the operations and distribution

• Uncertainties/variations in demand

• Flexibility in production smoothing

• Economies of scale in purchase and mfg

• To help hedge against price increases

Departmental Orientation Towards Inventory

• Marketing– Sell the product– Good customer service– Large inventory

Departmental Orientation Towards Inventory

• Production– Make the product– Efficient lot sizes– Large inventory

Departmental Orientation Towards Inventory

• Purchasing– Buy the required materials– Low cost per unit– Large inventory

Departmental Orientation Towards Inventory

• Finance– Provide working capital– Efficient use of capital– Low inventory

Goals of Inventory Management

• Maximize customer service (this requires carrying substantial inventory).

• Minimize inventory investment (this requires carrying little inventory).

– Customer service must be a strategic issue.

Types of Inventories

• Raw materials• Components• Work-in-process• Finished goods • Vendor inventories• Non-moving/slow moving stock• Safety stock• In-transit inventories• Service parts/Consumables

Inventory Costs

• Carrying cost or Holding cost

• Ordering cost

• Shortage costs

Carrying cost

• Cost of storage facilities• Handling cost• Taxes• Insurance• Deterioration• Obsolescence• Shrinkage• Cost of capital

Ordering Costs

• Preparation of purchase requisition/order

• Mail• Expediting, including fax, telephone• Transportation• Receiving• Put away• Updating inventory records• Paying invoice

SHORTAGE COST

Costs arising out of pushing the order back and rescheduling the production system to accommodate these changes

Rush purchases, uneven utilisation of available resources and lower capacity utilisation

Missed delivery schedules leading to customer dissatisfaction and loss of good will

The effects of shortage are vastly intangible, it is indeed difficult to accurately estimate

Inventory Control Systems

• How often should the assessment of stock on hand be made?

• When should a replenishment order be placed?

• What should be the size of the replenishment order?

The Inventory Order Cycle

Demand rate

0 TimeLead time

Lead time

Order Placed

Order Placed

Order Received

Order Received

Inve

nto

ry L

eve

l

Reorder point, R

Order qty, Q

Total cost of carrying

Total cost of ordering

Sum of the two costs

Minimum Cost

EconomicOrder Qty.

Level of Inventory

Cost

of

Inven

tory

EOQ MODELA GRAPHICAL

REPRESENTATION

EOQ Model

• Balance holding cost against ordering costs

• Calculate the optimal EOQ:

* 2DSQ

Ch=

•No of orders per year = D/Q*

Inventory Control Systems

Continuous Review System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

Periodic Review System

Physical count of items made at periodic intervals

Inventory Control Systems

•Continuous review -Fixed order quantity model - Two-bin system

-Less responsive to change in demand

-Difficulty of ordering of multiple items from same supplier

Periodic Review - Fixed time period model

ROP

SS

Q

L

Inven

tory

Level

Time

Safety Stock

Mean Demand during LT

Inventory Position Physical Inventory

CONTINUOUS REVIEW (Q) SYSTEM

AN ILLUSTRATION

Fixed Order Quantity Model

Reorder = Expected demand + Safetypoint during lead time stock

Fixed Time Period Model

• Reviewed at fixed specified time interval.• Place an order for a quantity that, when added

to the quantity on hand, will equal a predetermined maximum level.

• Independent demand is the usual situation.• Difficult to record withdrawals and additions

from stock.• Groups of items are purchased from a common

supplier.• Items that have limited shelf life.

SS

L

Inven

tory

Level

Time

Safety Stock

Inventory Position Physical Inventory

R 2R 3R

QRQ2R Q3R

Order Up to LevelS

PERIODIC REVIEW (P) SYSTEM

AN ILLUSTRATION

Fixed Time Period Model

• Small tools, manufacturing supplies.

• Common commercial parts such as nuts, bolts, washers.

• Office supplies.

• Perishable items such as dairy products, fruits and vegetables.

• Chemicals, solvents used in the manufacturing process.

Two-Bin System

• Special case of fixed order quantity model.

• Amount of stock equivalent to the order point is physically segregated into a second bin and is then sealed.

• When all the open stock has been used up, the sealed bin is opened and a new order is placed.

• Practical method for keeping control of low-value items.

• Without adequate training this system can be abused.

• Quantity in the second bin should be reviewed from time to time.

Single-Bin System

• Special case of fixed time period model.• Stock is periodically checked and each item is

ordered to a pre-established stock level.• Works well on floor stocks located near the

point of use, like large grocery stores.

ABC Classification System

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

AA - very important

BB - mod. important

CC - least important

Annual Rs volume of items

AA

BB

CC

High

Low

Few ManyNumber of Items

ABC Analysis

• Pareto noted that many situations are dominated by a relatively few vital elements.

• Controlling the relatively vital few will go a long way toward controlling the situation.

• Applying the ABC principle to inventory management involves:– Classifying the inventory items on the basis of relative

importance.

– Establishing different controls for different classifications with the degree of control being commensurate with the ranked importance of each classification.

ALTERNATIVE CLASSIFICATION SCHEMES

ABC Classification (on the basis of consumption value)

XYZ Classification (on the basis of unit cost of the item)

High Unit cost - Medium Unit cost - Low unit cost

FSN Classification (on the basis of movement of inventory)

Fast Moving - Slow Moving - Non-moving

VED Classification (on the basis of criticality of items)

Vital - Essential - Desirable

On the basis of sources of supply

Imported - Indigenous (National Suppliers)- Indigenous (Local Suppliers)

INVENTORY TURNOVER AND SERVICE LEVELS

Simple physical techniques may provide more economical

control of inventories.